Thursday, December 1, 2016

Yuan To Fall Further On Outflows, USD Rally, After Hitting Eight-Year Low

The Chinese yuan will plumb its lowest level in nearly a decade next year on sustained capital outflows and as the dollar rallies on expectations that U.S. interest rates will rise faster than previously thought, a Reuters poll found.

The closely-managed yuan CNY=CFXS fell to its lowest since early June 2008 last week, tracking a wider sell-off in emerging markets on a dollar surge following the shock election earlier this month of Donald Trump as the next U.S. President.

While Beijing has clamped down on outbound investments and used its foreign exchange reserves to keep the yuan from falling too rapidly, the poll of over 50 foreign exchange analysts this week showed further losses were possible in the coming year.

The yuan, also known as the renminbi, has already weakened some 6 percent against the dollar this year, including over 1 percent since Trump's surprise victory. That has led to a stark shift in analysts' calls compared with last month's survey taken before the U.S. Presidential election.

Over three-quarters of respondents in the latest poll who made a 12-month forecast expect the yuan to reach or weaken beyond 7.00 to the dollar by then, compared to one-quarter in last month's survey.

By the end of this month, the yuan will likely trade at 6.90 to a dollar, not far from Thursday's 6.89, the poll showed. But it is then expected to depreciate steadily to 7.14 in a year, marking its lowest level in nearly a decade, if reached.

"With...previous rhetoric from U.S. President-elect Donald Trump labelling China as a currency manipulator, fears of a disorderly depreciation have risen," analysts at Lloyds Bank wrote in a recent note.

"While concerns over the latter may be premature, the recent spike higher in U.S. term interest rates could easily re-exert capital outflow pressures in China in coming months."

The U.S. Federal Reserve is widely expected to raise interest rate later this month, and investors will be watching for any signal that the Fed is eyeing a steeper path for rates increases in the coming year.

The People's Bank of China has tried to curb speculation of one-way depreciation by setting both higher and lower mid-points recently.

Also taking its toll on the yuan is the uncertain outlook for China's economy, with conflicting signs on whether Beijing's attempts to re-engineer the economy - to derive future growth from consumption rather than exports - is working.

Data on Thursday showed activity in China's vast factory sector expanded at its strongest pace in more than two years in November.